Why We're Selling Up!

Join me today as I discuss the recent sale of a significant property in our portfolio - one of our first-ever HMOs. Selling properties is not something we usually do, so I’m diving deep into the reasons behind this decision and exploring what made this particular project a candidate for selling, what the process of selling looked like, and of course, how much we actually sold it for!

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Transcript

Mike Stenhouse

So today I thought I'd give you a bit of an update on one of our projects that we have just sold. One of our longest standing properties in our portfolio, one of our first ever HMOs that we created. And it's unusual for us to sell things. So I guess there's gonna be some questions about why we chose to do that and specifically why we chose to sell this particular project. So that's exactly what I'm gonna run through with you today. But I suppose before we get into that, bit of an apology, this was gonna get done.

a few weeks ago, I had planned to record this whilst I was away on holiday. Took my camera with me, took my microphone with me. We were traveling around France for a few weeks. We spent a week in La Rochelle, doing a little bit of sailing with Victoria's mom and dad. That was super fun. And then we went across to Morzine in the French Alps, I think, in the French Alps. I mean, it's definitely in France. I don't know if that part of the mountain range is classed as the Alps. But anyway, it's like an hour from Geneva. We've been there a bunch of times in winter.

I've been there a couple of times in summer and we love it. We were hiking, the dogs got plenty of outdoors time. We got plenty of outdoors time. The weather was good and we just had a really nice time. So plenty of excuses and reasons to not record this podcast. So forgive me for that. From a portfolio point of view, things are going pretty well. We got two projects that we are rattling on with. We've got our washway project, which is a conversion into three apartments. Join your work on that's almost finished. So I'm excited to go and see that.

tomorrow and then Flores Street are part conversion, part new build, the brickies are on site there and they should be making good progress as well. We've also got very close to completing on our latest purchase, a little commercial to resi conversion. So I'll show you around that as soon as we get the keys. But today, I thought I would start off with this discussion around what we've sold and why we've sold it with the reasons why we've sold it. And there are five of them, but typically, I mean, let's start here.

we don't invest to sell stuff. Usually our approach has been, and I think always will be to buy stuff at as much value as we can so we can refinance most of our cash back out of it and then find a way to rent it out for as much money as we can so that we've got as good an income from it as possible. And that model isn't likely to change for us, I don't think, but I've realized that sometimes it is the right time to sell something.

And that's what I'm gonna try and explain, justify my reasons, see what you think. Let me know if you agree or disagree with any of these reasons that I'm gonna run through with you, but like I said, I think there are five main reasons that we chose to do this. Now, first of all, it was a good time to sell, and it seems a little bit unusual, maybe, with everything that's going on in the market, with interest rates going up, utility bills going crazy. Why would anyone be interested in buying an up and running HMO where there's very little potential to add value?

and running costs are gonna be higher now than they have been at any time over the last decade or more. That was my belief, but speaking to a couple of people, a couple of agents, and particularly the agent that we chose to try and help us sell this, I'll come onto that process of selling it a little later. You know, their belief was there are lots of people, cash buyers particularly, looking to park their cash. Single lets don't really fit the bill because the return is so low.

and they're looking for high return, high yielding, up and running assets that they can just dump their cash and they don't need to worry about planning permission or renovations. So I was skeptical, but I'd spoken to enough people and got the sense that there seemed to be a different breed of buyers that were interested in this. And I thought, well, let's give it a chance. If we don't get the numbers that we want, if we don't get the offer that we want, we don't need to sell it. But what's the harm in putting it on the market? Second reason.

It had a lot of equity in it based on these like high valuations that people were talking about and you know, I knew that we would never get it valued at that. It was a residential building in a row of residential houses and I think even the valuation that we had got on it was pretty good. We were talking from a sale price point of view like 40% higher than what we'd had it valued at.

and I knew we could never get it valued at that from a traditional lender. So all this equity that was potentially there that another buyer would see in this property, we just couldn't tap into ourselves. So that money was kind of tied up unless we sold it. Third reason, I didn't love the house. I was gonna say I never have done, that's technically not true. I did definitely like this house at the start.

It taught me a lot about HMO investing. It gave us a good start to our income when we're looking to leave the corporate world behind and replace our incomes. And it's done very well for us over the years financially, but it was a two-bedroom terrace that we converted into a six-bedroom HMO. So you can imagine the rooms were small, particularly compared to the type of HMOs that we do now, which are usually commercial conversions where we've got much bigger floor space to work with. We had limited bathrooms, so it was a six-bed, three bath.

Two shared bathrooms, one en suite. Still way above like the minimum standards for bathrooms that Stockport Council require. But most of our stuff now again is kind of all en suite or certainly majority en suite. So they said small bedrooms, limited bathrooms and limited communal space. Certainly when we first bought it, we had an open plan kitchen slash lounge on the ground floor, but it wasn't massive. Laterally, we actually converted the basement to give us a separate standalone lounge. So that made a big difference.

But still, for six people, it wasn't tons of communal space. So all the things that I talk about in creating a good HMO, this one didn't really tick those boxes. And like I said, we learned lessons from it. It taught us a lot and it has still rented well. But it wasn't something in our portfolio that I was super proud of or that I looked at with real affection. It wasn't a bad house. It did always rent well, but it's just not something that we would create now, if that makes sense. So that was our third reason.

Fourth reason, better use of the money. We have other things going on that we could deploy that sort of locked in capital or equity against if we could free that up. So some of the funds are gonna go towards the new purchase that I mentioned that's completing soon. So it's a deal that we love in a location that we're super passionate about down Stockport's underbanks. We did a project there recently that you'll be familiar with. If you've followed us for a while, IPI Brewery, very similar style and type of project to that. So.

you know, gonna be a much better long-term asset in our portfolio versus just another sort of resi to HMO conversion. And some of those funds are, well, they have gone towards buying out a JV partner on another deal. So that's given us, you know, a part of that cash that we used to buy out that JV partner has effectively replaced the income that we lost from selling this HMO. And then we still had a lump of cash leftover to put into this.

new project. So that's worked out well for us. There are a couple of reasons that freeing up that cash could be put to better use for us right now at the stage that we're at with our own portfolio growth. And then the fifth reason is this was one of the houses that's in our personal or was in our personal names. So most of our portfolio now is bought in limited companies. I presume that's how most of you are doing it as well. But this one.

was pre-section 24 being announced, so we had it in our personal names, and it made it really inefficient from a tax perspective. So it wasn't a major driving force for us to sell this, like it still made us a good profit every month, but when we were thinking about selling something, the properties in our personal names were obviously the first ones that we were gonna consider. So they're the five reasons that we chose to sell this. Somebody told us it was a good time to sell and.

whilst I didn't believe it, we had nothing to lose by testing that. We couldn't release that equity via refinance, so the only way to realize that was to sell it. I didn't love the house. It was in our personal names and we had some better uses for those fundings, those fundings, those funds. So that kind of gives you some of the reasons behind why we chose to sell this right now. Now, I mentioned a little bit about the property, but let's go into some of the details there. So.

As I mentioned, it was one of the first intentional HMOs that we created when we moved across to Stockport. I'm not gonna go into the background of our story here, but certainly not in too much detail. We kind of dabbled with it accidentally in Newcastle where we lived and then we decided property was gonna become our full-time focus. We moved to Manchester to Stockport specifically, started growing our portfolio here.

and focused on HMOs as the quickest way to replace our income. And this was one of those first deals that we did. So it's been in our portfolio since, I wanna say like for eight or nine years now. So, you know, it's been a decent chunk of time that we have owned this. We bought it as, so it was a repossession. It was previously used as like a cannabis farm. So that was fun. You know, it was in pretty poor condition. It was a detriment to the street.

like a lot of the neighbors were kind of glad to see somebody come in and buy it. I'm not sure they were still glad when we started all the work and everything, but it wasn't a great property. It wasn't somebody's family home. It was this really rundown two bedroom terraced, or I think it's actually, yeah, no, technically it's a semi-detached house. They're all very close together, so I always refer to them as terraces because they look like that. But anyway, two bed semi.

And we converted it into a six bedroom HMO by converting the loft. So that gave us two bedrooms with like a dorm or loft conversion and one en suite. We obviously renovated the first floor and there were three bedrooms there and one communal bathroom. Then on the ground floor, we had one bedroom in the lounge where the lounge used to be and a bathroom.

And then at the rear of the property, we put a single story extension on it to make that communal space bigger. So kitchen and open plan lounge space at the rear of the ground floor. And then as I mentioned more recently, like three years ago or so, we ended up converting the basement as well to give us more communal space. And just improve the standards of the house also allowed us to bump up the rents a little bit as tenants moved out, but it was the right thing to do for that property. It added some value to it. And yeah, it was a nice way to keep investing in that property.

years after we had bought it. So it sat there for a long time. It effectively makes us in, or made us, I need to get used to not owning it anymore, in excess of a thousand pounds a month, every month more or less for the last eight or nine years. So a pretty good little asset. And then obviously we had to sell it. So once we decided that we were gonna try and get rid of it.

I thought I'd explain to you what that process actually looked like. So what piqued my interest initially was post from a Facebook friend of ours who shall remain nameless. He's now no longer involved in that company, but it was a Facebook friend who ran an HMO specific estate agency. And I was really impressed with the figures he was talking about. So he was saying about some of the multiples that he was getting.

some of the valuations that he was selling HMOs for based on that rental income. So I had a conversation with him and it was like, if you can achieve this, because it's far above what we could get it valued at from a refinance point of view, if you can achieve this, I would be seriously interested in selling this. So we had that conversation, his personal circumstances slash living arrangements, if you know, you know, they kind of changed rather abruptly pre-Christmas. So things were put in the back burner for a little while.

We picked up again in the new year with the new management team in place for the HMO agency. The onboarding process was relatively smooth. We effectively chose them A, because of the prices that they were getting and B, because they're, as far as I'm aware, the only exclusive HMO estate agency in the UK. So they had pretty broad reach, not just to investors in the UK, but overseas as well. And like I say, I was very happy with that.

valuation. So the way that they valued it, the valuation on it was in the range of 300 to 320 thousand pounds. Now I knew that anything starting with a three, I went into this thinking if we can get a number that starts with a three I would be absolutely over the moon. So I said we'll give you 12 weeks we'll see what happens we're not in a rush to sell it we don't need to sell it but if you can get us an offer we'd be happy to progress with it at that price point. We did

it was slightly over the 300,000 pounds mark, but it was subject to finance. And knowing what I know about the valuations that we'd had on this property in the past and how I typically see not lenders, but lender's surveyors valuing HMOs of this type that are kind of residential stocks surrounded by other residential stock in this area, I was pretty confident that he wouldn't get a valuation anywhere near to that 300 plus figure that he'd offered. So.

Like I say, I was a little bit wary, so I accepted it, but on the condition that we'd leave it on the market until the valuation was completed. And ultimately this spooked them. They didn't like the fact that I wasn't confident in their valuation, so they withdrew their offer. Fine, the 12 weeks came and went without much additional input or excitement happening, so we withdrew it from them. And then, I kind of figured, well.

You know, that was an interesting process, but the hype about how much they're selling their HMOs for is just that, and it's hype. But then, strange thing happened, somebody who works for us, so knew we were selling this, had spoken to a family member, I don't know exactly how that conversation went, if one introduced it to the other, or vice versa, but a family member was interested in investing, Jess did a viewing, so this was after we'd withdrawn it from the market with the agent.

and they offered 290,000 pounds cash. So a little bit less than the 300 that we were looking for, but by this point I was kind of mentally invested in selling, I'd kind of come to terms with the fact when we got that initial offer just over 300K, I was like, yeah, we can do some other stuff with this money, it's a good price, I'm happy with that. I'm ready to let this property go. So 290,000 pounds is a little bit shy of that 300K that I wanted, but you know, we were happy.

with it, generally speaking, and it promised to be a very quick sale, which would give me that pot of cash to do other things with. So we accepted it. The sale went through in about four weeks. So really, really quickly, it was a smooth process. Jess handled most of the communications with solicitors and stuff from our side. So I didn't really see a huge amount of that, other than just the speed that it went through it. And that £290,000 is effectively a 12.8%.

gross yield. So if you're thinking about, well, how much could I get from my HMO? That's kind of the region that they were getting valued at 12 to 13 percent gross yields. And we can talk about that separately and how we'd calculate that in another video. That would be useful for you. Let me know in the comments the sort of rental income that you've got. And, you know, I can give you an explanation of how we would calculate that. But, you know, cards on the table and the gross rental income.

as a percentage of the sale price would give us that 12.8% gross yield. So we were pretty happy. The deal is done. It's gone. The money's in the, where the money was in the bank and now that's been spent on other things, you know, easy come, easy go. But I'm ultimately, I'm pretty happy with the outcome. So much so that we're considering selling something else. So, well, actually we're in the process of selling it. I'll share the details of that.

in another video perhaps, but slightly different situation here. This one is one that we own as a joint venture with an investor that we've been working with for years. I was talking through him with through the process with him of this first HMO that we had sold. And effectively with this JV partner, we've got three HMOs. Two of them went very well. And the third one still went well. It's a great project, but.

we got a lower valuation. It was downvalued effectively when we finished it. So across those three HMOs, we've got about a hundred thousand pounds tied up between them. It's not a huge sum of money, given the rent that we achieve across those three HMOs, but the money that we will make from selling this third one will more than pay off that a hundred grand. So we'll be left with two that make us a decent monthly profit rather than three that are just repaying the loan to that JV partner for the next several years.

We've used the same agent, we had better success this time. We accepted an offer, the sales progressing. This one was a similar valuation, this was 11.6% as a gross yield, but it's a bigger property, so I guess that makes a difference, and we'll see if it gets over the line. If it does, I'll share all the details about that one as well. But if you've got any questions about this, let me know wherever you see me posting about this, whether it's YouTube, Instagram, Facebook, or LinkedIn.

give it a like, give it a thumbs up, give it a little heart emoji, whatever works for you. And yeah, thanks for watching, thanks for listening. I'll speak to you next time.